EUR Head Fake?

Expect these markets to be sucking mostly wind until something more concrete comes of this weeks EU summit. Even with Italy and Spain back in the debt market today, investors focus remains firmly on Thursday and Friday. So far this morning, the market has not been fooled by fast money specs buying EUR’s on comments about eventual EU fiscal union. Next steps on the subject are a report due in December. It seems that the record -EUR22.7b short the single currency bet will probably take these limited upticks to sell more as the quick buyers seem to have jumped the gun and run into another brick wall of offers. Just look at the peripheral yields, both Spain and Italy continue to edge higher. That is to be expected with Italy back in the market, issuing up to +EUR3b of 2014 zero-coupon bonds and 2016 and 2026 inflation linked bonds. Spain has also be issuing bills with much higher yields.

Temporarily giving a little boost to the EUR mood this morning was data from Germany’s GfK group showing that consumer sentiment is set to improve next month from an already elevated level. The forward looking climate index rose to 5.8 from this months 5.7 print. Despite a winning release, shout outs like this tend to have a limited affect on currency levels. Certainly providing no support was the Italian retail sales data for April coming in a much weaker than expected -1.6% with the y/y decline at -6.8%. This yearly print was the sharpest fall in a decade. On the face of it, it looks far worse, but, when the data is adjusted for inflation, it’s not that alarming. It so much easier for economists to explain away some of the bad reporting! However, the weaker data does maintain concerns over the outlook of the Italian economy. The PMI data certainly supports this.

Moody’s downgrading 28 Spanish banks along with the periphery supply issues is keeping upward pressure on global yields and should have currency traders on their toes. Is it wishful thinking for a favorable outcome at this weeks EU summit? There is a lack of evidence that the core Euro countries have changed their stance. Germany, at every opportunity, continues to be defiant in their austerity and Eurobond rhetoric. Market attention is clearly focused on whether EU heads of State will finally deliver a credible response to the crisis. Is history to repeat itself? The market has been at this juncture before and are we about to take the ‘right’ turn? A short -EUR22.7b bet says NO.

The outstanding current positions amongst the major for retailers is long USD/JPY and long AUD outright. Everything else is evenly split. Retailer investors have not been up for much intraday position taking so far this week. They seem preoccupied with other asset classes, specifically equities. The risk reward is to do nothing until after the summit. The closer we get to an outcome, expect more of the market shorts to be pared back. Already this morning the market has hit another brick wall, stalling ahead of the 21-DMA (1.2530) and ahead of a plethora of stop losses. According to the technicals, the daily trend indicators continue to favor the bears and yesterday’s close below the 21-DMA is encouraging us to witness a drop with another big handle print. Do not be surprised to be trading in a less than enthusiastic environment for the next few days as we all wait for another EU outcome!

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EUR Summit leads to stops